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A sector in crisis: the impact of coronavirus on the oil industry

The energy sector has been one of the most severely impacted industries in the COVID-19 pandemic, with the lockdown measures implemented to stifle the spread of the virus causing a steep global reduction in energy demand.

The sharp decline in manufacturing, almost total shut down of the aviation industry and reduction in road travel has meant that the usual demand for fuel has reduced at an unprecedented rate.

According to the Global Energy Review published by the International Energy Agency (IEA), countries in full lockdown are experiencing an average 25% decline in energy demand per week and countries in partial lockdown an average 18% decline.1

This decline has led oil prices to go into freefall. For the first time in history, the US oil price temporarily turned negative, with the West Texas Intermediate (WTI) – the US benchmark for oil prices – declining to almost -$40 a barrel2.

For a sector that was already under immense pressure from both climate change and the threat of peak demand – what is the impact of this latest crisis on the future of the oil industry?

A catalyst for change?

It is likely that with the supply of oil currently, many suppliers will shut their wells. According to a report by Business Insider, most oil and gas giants have already slashed capital spending and dividends, laid off or furloughed staff, and changed their production targets.3

“In the past, activity decreased then picked up again — each time, we saw it come back,” says Gordon Ballard, head of the International Association of Oil & Gas Producers. “Now it’s not entirely clear if things will just come back as normal. Everything has changed.”4

Lord Browne, the former CEO of BP, believes that as countries begin to rebuild following the pandemic it could positively impact climate change as people focus on health and the environment.

“We’re seeing just how fragile the world is in this pandemic, and an awareness of fragility is a very important thing in shaping human behaviour,” says Lord Browne “People who have spent months worrying about their lungs are more likely to want clean air.5

Indeed, the pandemic has had a significant positive effect on the environment. The International Energy Agency has reported that global energy-related CO2 emissions are set to fall nearly 8% in 2020 to their lowest level in a decade.6

“We have never seen in history emissions go down so substantially. To put it in context, the decline in emissions this year (2020) has erased the increase in global emissions in the last 10 years” says IEA executive director Fatih Birol. “[However], if we don’t take the right measures, we may well see a significant rebound of emissions with the economic recovery in the next year to come.7

Such a tangible positive impact from the reduction in energy consumption clearly presents a unique opportunity for Governments to structure their economic recovery plans with a focus on climate change.

“I think the pressure to accelerate the forces driving the energy transition will only increase as a result of this crisis,” said Mark Lewis, global head of sustainability research at BNP Paribas Asset Management8.

However, there is a risk that the current economic instability could derail planned moves to greener energy sources. As governments race to bring their financial positions back on track they may opt to further delay the structural transformation needed to move their economies away from oil. As an extremely profitable business, the oil industry is also likely to lobby hard to maintain its position.

Although, no matter how governments approach their economic recovery, one thing is for certain; we cannot rely on oil forever.

Have we reached peak oil?

Some experts believe that the pandemic has brought forward the date we will reach ‘peak oil’ – the scenario when oil either runs out or oil alternatives become more cost-effective, making exploration and production unprofitable. It has previously been predicted that we will reach peak oil between 2035 – 2050 . However, there is speculation that it will now be sooner, with stakeholders including Shell CEO Ben van Beurden believing that the likelihood of demand peaking this decade has risen as a result of the pandemic . A minority believe that it may even happened in 2019 and oil demand will never again reach pre-pandemic levels11.

Whilst we do not yet know the full impact, demand is beginning to increase as lockdowns ease. Official predictions for recovery are looking slow – the IEA estimates that consumption will be down 25.8 million barrels a day in May, and 14.6 million in June. In December, it predicts it will still be 2.7 million a day below 2019 levels12.

However, some believe that once economies properly open back up, recovery for the oil industry will be much swifter than this – after all, we currently have a surplus of oil and prices are low.

The problem is, no one knows at this point when the world will be fully operational again – and indeed what the new normal will be. “The energy industry that emerges from this crisis will be significantly different from the one that came before13” says Birol.

Environmental vs Economic Value

It is also important to remember that the environment should not only be regarded as important when it makes economic sense to prioritise it. It also holds its own value and the law is a powerful tool to bring positive change.

“Natural Capital is about using economic tools to work out the contribution nature makes to our economy and our well-being. These kinds of tools can be really useful in helping us to protect the environment” says Tom West, Economics and Law Researcher at ClientEarth – a charity that uses law to achieve systemic change and protect the environment.

“But it’s also important to realise that economic values can’t capture all of nature’s value” continues West. “Nature has intrinsic value; it has value for its own sake”14.

It would be an important win for the environment if the pandemic did accelerate us towards using greener energy sources, but the long-term impact remains uncertain.

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References:

  1. UNKNOWN (2020) Exploring the impacts of the Covid-19 pandemic on global energy markets, energy resilience, and climate change (Online) Available at: <https://www.iea.org/topics/covid-19> [Accessed 22.05.20]
  2. AMBORSE, J (2020) Over a barrel: how oil prices dropped below zero (Online) Available at: <https://www.theguardian.com/business/2020/apr/20/over-a-barrel-how-oil-prices-dropped-below-zero> [Accessed 22.05.20]
  3. JONES, B (2020) Layoffs, furloughs, and budget cuts: We’re tracking how 18 energy giants from Halliburton to Shell are responding to the historic oil market meltdown (Online) Available at: <https://www.businessinsider.com/how-top-oil-companies-are-responding-to-the-price-shock-2020-3?r=US&IR> [Accessed 22.05.20]
  4. RAVAL, A (2020) Big Oil faces new reality where ‘everything has changed’ (Online) Available at: <www.ft.com/content/695be02b-cbc8-4f0f-9d17-968a3fe9b9a2> [Accessed 22.05.20]
  5. BROWNE, J (2020) Pandemic crisis offers glimpse into oil industry’s future (Online) Available at: <https://www.ft.com/content/99fc40be-83aa-11ea-b872-8db45d5f6714?segmentID=d000ce45-8c25-aa67-8d82-a8ab39602280> [Accessed 22.05.20]
  6. BROWNE, J (2020) IEA Global Energy Review (Online) Available at: <https://iea.blob.core.windows.net/assets/74921671-51f5-4b5d-b88f-cd58b24ae23f/GER2020_PRESS_final.pdf> [Accessed 22.05.20]
  7. BIROL, F (2020) IEA Executive Director Fatih Birol on What is Starting to Bring Oil Markets Back to Balance (Online) Available at: <http://news.ihsmarkit.com/prviewer/release_only/slug/bizwire-2020-5-15-iea-executive-director-fatih-birol-on-what-is-starting-to-bring-oil-markets-back-to-balance-early-signs-of-recovery-in-global-energy-demand-and-why-predictions-for-the-demise-of-us-shale-are-premature> [Accessed 22.05.20]
  8. LEWIS, M (2020) The world may never recover its thirst for oil (Online) Available at: <https://edition.cnn.com/world/live-news/coronavirus-pandemic-04-29-20-intl/h_fb8fb42476691839f2592f4e9330e4ca> [Accessed 22.05.20]
  9. KENTON, W. (2018) Peak Oil [Online] Available at: <https://www.investopedia.com/terms/p/peak_oil.asp> [Accessed 28.01.20]
  10. VAN BEURDEN, B (2020) Shell CEO Says Pandemic May Change the Oil Business Forever (Online) Available at: <https://www.bloombergquint.com/business/shell-sees-lasting-change-in-consumer-behavior-beyond-pandemic> [Accessed 20.05.20]
  11. LEWIS, M (2020) Why we may have already seen the peak in oil demand (Online) Available at: <https://www.ft.com/content/bea183be-779c-491b-8ec6-f05da9fa5337?utm_source=newsletter&utm_medium=email&utm_campaign=newsletter_axiosgenerate&stream=top> [Accessed 22.05.20]
  12. BLAS, J (2020) Global Oil Demand Starts a Long, Painful and Uncertain Recovery (Online) Available at: <https://www.bloomberg.com/news/articles/2020-05-03/global-oil-demand-starts-a-long-painful-and-uncertain-recovery?utm_source=newsletter&utm_medium=email&utm_campaign=newsletter_axiosgenerate&stream=top> [Accessed 22.05.20]
  13. BIROL, F (2020) IEA Global Energy Review (Online) Available at: <https://iea.blob.core.windows.net/assets/74921671-51f5-4b5d-b88f-cd58b24ae23f/GER2020_PRESS_final.pdf> [Accessed 22.05.20]
  14. WEST, T (2016) Nature is not only natural capital (Online) Available at: <https://www.wcl.org.uk/nature-is-not-only-natural-capital.asp> [Accessed 27.05.20]